Test the drive outside of the operating system. You can do this using a Windows operating install disk, or a Linux live cd, or something like the Ultimate Boot Disk.
Your boot order in the bios must be set to look for the optical drive first, not the hard drive. If you have an OEM machine, look in the manual for instructions on how to get into the bios. Most home built machines use the Del key to enter the bios (hit the power button, then click on Del before the operating system starts up).
Put the bootable disk in the drive, then restart the computer. If the drive spins up and sees the bootable disk outside of Windows, then you know it is physically ok, but there is some software problem. If it still cannot read the disk, you know the hardware is at fault.